Why Businesses Fail? – Avoiding common statistics

From our “Ask an Expert” blog – John L. asks –“You mentioned in your recent article (Why Marketing alone can’t save your business) that a business should focus more attention on fixing common reasons businesses fail before addressing Marketing. What are those issues you are referring to?”

Thank you for the question and reading our blog. In that article we made the point of when people are searching for a Consultant, the current Google trend is to search for one that will get more business in the door opposed to how to fix a failing business. My interviews with many Small business leaders shows that many owners may feel Top line revenue is the only thing needed to fix an ailing business, when in fact there is often much more to it than that. Our concern is that people don’t always know what signs to look for or how to judge the strength of their businesses ability to generate revenueother than looking at a Marketing fix.

So what are the top reasons a business fails? Our company has researched many different sources to find 2 common reasons. I have presented this concept to MANY Business Bankers, Accounting groups, Accellerators and Chambers, who ALL agree with our approach.

The Top 2 reasons Business FAIL are:

Lack of Education – Business Acumen & Experience

Lack of Timely or Appropriate Funding

Business Acumen is a combination of a variety of skills, experience, decision making and planning ability. Many people have a specific expertise which may be enough to start a business, but other skills are needed to build a successful business and this creates a skills gap. Not gaining or hiring for those skills can leave a gap in Business operations, which over time devalues a business.

Appropriate funding refers to funding at different phases of business growth. Start up funds, seeking capital growth funds or credit line at appropriate times, and managing Revenue capabilities (or cost controls) that maintain budgeted margins.

Some common statistics –

50% of Small Business fail the First year

65% of Small Business fails within 3 years

~80% of Small Business fails with in 5 years

of those

80% of Start ups fail due to lack of Management Knowledge and skills

* SBA,D&B,US Census, Inc Magazine

92% of Small Business fails due to poor

Management Acumen

* Dunn & Bradstreet

Failure is 2X more likely due to Quality of Management than due to External Factors

*National Bankruptcy Annual Reports

90% of FAILED Business is due to lack of Quality Management.

of these:

48% classified as incompetence

42% classified as inexperienced

*IMC (International Management Consultants)

These are pretty sobering statistics and speak to the point my business continually addresses which is; there are multiple areas to build upon to strengthen and grow a business. There is a growing need for people capable of Holistically Assessing and Planning. Where does a business person start when they want to look at their own business you ask? Start with these common traits we have found that support the 2 Most common reasons listed above.

Reasons a New Business FAILS

Lack of understanding the effort needed

Inadequate financing

Lack of planning

Unrealistic expectations of success & salary

Inability to commit

Unwillingness to take responsibility

A key problem for Start Up Business is that they don’t know what they don’t know. Seeking the advice of people that can both Mentor & Lead them andtheir plan development helps significantly .

Reasons Existing Business FAILS

Poor cash flow management

Seek funding too late

Absence of Performance Monitoring

Lack of target Audience research

Poor inventory management

Failure to identify your own Strengths Weaknesses (SWOT)

Insufficient professional resources

Anyone who has run an Organization (Profit or Non Profit) knows how many hats you have to wear. There are so many obstacles that come up, you become seasoned in researching and solving your own problems. The difference between a Pass or FAIL here we have found is often a combination of 3 things.

Over confidence in your own assessment capabilities

Misinformation

Closed mindedness

In post mortem interviews with owners or Executive Directors, a common response is “I should have this, or I should have that”. Retrospection shows the same 3 conclusions listed above. There are many other complicating issues and each case is unique, but if you are in a position where you need to do something (and quickly) to “turn things around”, I suggest looking (in addition to Marketing) at these issues to insure you can make the most of your revenue.

Last thought – If you are just looking to increase your profit line by a few points, improving internal efficiency can add as much to your profit line as adding to your Top line revenue.